North Face

appellation 2 northernmost fountain Auditors be faced with the very severe task of insuring the public, that in their opinion, the financial statements of their nodes atomic number 18 accurate and impoverished of all material misstatements. The problem is that corporeality is a subjective figure. In the North give case an immaterial revenue recognition entry finish up being material when compounded with sp ar misstatements. North prospect was the perpetrator of the intentional misstatements tho they were concealed by the Deloitte audit advisor, Richard Fiedelman.Fiedelman allowed additional non-recognizable revenue to be posted and altered/replaced the original on the job(p) paper that reported the original material misstatement. (Knapp, Rittenberg, Johnstone, & Gramling, 2012) Several generally accepted write up statement principles (GAAP) and generally accepted auditing standards (GAAS) were violated (In the Matter of Richard Fiedelman, 2003) resulting in declini ng stock prices and shelter and Exchange Commission ( secant) sanctions. mo Sanctioned Richard Fiedelman The south requires the all registrant cliping paper be rounded by a partner that is not depute to the involvement.When the Deloitte concurring partner rear the discrepancies and misstated revenue they investigated further leading to the review and the ultimate discovery of the altered growss papers. North Faces audit committee then retained a second account statement pissed to investigate the accounting records which led to the second gear sanctioning Fiedelman. (Knapp, Rittenberg, Johnstone, & Gramling, 2012) 1. The sulphur sanctioned Richard Fiedelman for impuissance to document the changes that his subordinates had make in 1997 North Face puddle papers and for helplessness to exercise due employmental dish out.Explain the minutes rational in making each of these allegations. The SEC found that Fiedelman violated GAAP by allowing recognition of profit bord er on the second barter transition and violated GAAS 150, 230, 326, and 338. (In the Matter of Richard Fiedelman, 2003) Failing to written document Work Paper Changes Per the several GAAS violations the SEC was right to sanction Fiedelman for failing to document the changes make to North Face working papers. AU 338 (339A) directs auditors on the importance of working papers.Working papers are the principal record of the work that the auditor has done and the conclusions that are reached concerning significant matters. ( domain Compevery Accounitng reverting Board, 1982) The working papers help insure that the audit engagement has been properly intend and adequately supervised. It is in like manner the record of the audit evidence and procedures applied to the audit. Fiedelman also violated Auditing Standard No. 3 which is very clear that every changes must be documented. Circumstances whitethorn require additions to audit financial backing after the report release participatio n.Audit documentation must not be deleted or discarded after the documentation completion date, however, education may be added. Any documentation added must indicate the date the information was added, the name of the person who prepared the additional documentation, and the reason for adding it. (Public Accounting Oversight Board, 2004-06) When Fiedelman revised the 1997 work papers without the proper documentation he violated Standard No. 3 justifying the SEC sanction. Failing to Exercise due Professional Care Fiedelman violated AU 150 and AU 326, failing to execute due professional business organization.AU 150 states that due professional criminal maintenance is to be exercised in the performance of the audit and the preparation of the report. (Public Accounitng Oversight Board, 2001) AU 230 explains that due professional sustainment is employments where peculiar skill is requisite, if one offers his services, he is understood as holding himself out to the public as posse ssing the tip of skill commonly possessed by others in the same employment, and if his pretentions are unfounded, he commits a species of fraud upon every man who employs him in opinion on his public profession. It does state however that no one is palliate of error.Due professional care does not intend work to be free of error only free of negligence. (Public Accouniting Oversighe Board, 1972) Fiedelman violated the due professional care standard when he allowed the misstatement and margin recognition to be posted. The misstatement was already noted but he himself should pass been aware that the margin was not permitted and that the misstatement should beget been change by reversal. It is also concerning that the increased sales from $90,000 to $3. 9 million was not investigated to a greater extent thoroughly, again indicating Fiedelmans lack of due professional care.Fiedelman also violated AU 326 Evidential Matter. With the violations of so many auditing standards the SEC had no other alternative but to sanction Fiedelman. (Knapp, Rittenberg, Johnstone, & Gramling, 2012) If there is no punishment for altering working papers auditors would fear no repercussions and they would alter the papers whenever they wanted cut the publics assurance of financial statement accuracy SECs Punishment The SEC punished Fiedelman by suspending him from being gnarled with audits of SEC invitees for three years. 2.Take a position on the severity of the SECs punishment of Richard Fiedelman of a three year suspension on being involved in the audits of SEC clients, support your position. The punishment was fair. The accountability of an auditor is to insure financial statement users that they are free of any material misstatements. In this case Fiedelman made a conscious prime(prenominal) to allow North Face to post margin that should not have been realized, per GAAP. Fiedelman should not be allowed to practice with a public accounting firm until the SEC feels that h e forget not allow the same misstatements to excrete again. In the Matter of Richard Fiedelman, 2003) In order to insure the public that the auditing profession is reliable this kind of punishment is necessary. Each case should be reviewed on an individual al-Qaida and if there is any question that the auditor will continue to allow misstatements they should be suspended from being involved with SEC clients. Modify Client Work Papers The PCAOB has very specific instruction manual that any additions or changes to audit documentation after the release date need to be documented. 3. Assuming that you are an audit manager in a public accounting firm.The engagement partner asks you to modify client work papers after the financial statements and opinion has been come forthd. Determine what you would do in this situation. Provide your rationale. If the partner is not asking me to hide the variety and the modification is necessary, per GAAP or audit principals, then I would line the modification. If the client partner is asking to have the papers modified without documentation, or the modification should not be done, I would not modify the work papers. Auditing standard No. 3 clearly states that any modification take to be documented. Public Accounting Oversight Board, 2004-06) In the North Face case it does not indicate the personnel that altered the work papers were reprimanded, (Knapp, Rittenberg, Johnstone, & Gramling, 2012) however as a manger if it is discovered that you altered work papers without documentation or necessity, even if there were no jural repercussions, it would hurt your reputation and ultimately affect your career. The decision analysis mannequin could be used in determining if it is necessary to notify several(prenominal) other audit partner or the client audit committee to the highest degree the request.I would not alter the papers but if no one is made aware of the advisors request they may get psyche else to alter the work pape rs. In this case morality and ethics should be enough to prevent a manger from altering work papers, but it helps to have punishments in place to help deter unethical actions. materiality Public accountants generally use qualitative analysis to determine the give up level of material misstatements. 4. Evaluate the practice of materiality used by public accounting firms and how accounting firms should address it with clients. Materiality is based on the assumption a reasonable investor would not be influenced in enthronisation decisions by a fluctuation in net income less than or equal to 5%. This 5% rule remains the fundamental basis for working materiality estimates. (Vorhies, 2005) Since materiality is based on the fact that investors would not be influenced when immaterial misstatements are found, if the numbers of immaterial misstatements are microscopical they will not prevent an unqualified audit opinion.Large misstatements and a jumbo number of small misstatements that could be considered one misstatement need to be corrected before an unqualified opinion can be issued. Since all misstatements are presented to precaution and the audit committee, how the misstatements need to be addressed should be discussed with them at that time on. If they refuse to make the corrections the auditor should refuse to issue an unqualified audit opinion. (Vorhies, 2005) It is important to remember that every misstatement needs to be analyzed for materiality.A small misstatement may not seem relevant but may be an indication of a larger aggregate or future misstatement. (Public Coumpany Accounting Oversight Board, 2010) North Face Management Auditors are not required to criticize separate decisions made by their clients anxiety squad, that does not mean they should not use due professional care when analyzing anxiety behavior. 5. North Faces counselling teams were criticized for strategic blunders that they made over the course of the companys history. Discuss whether auditors have a responsibility to assess the tonus of the key decisions made by client executives.Defend your answer. When auditors are evaluating audit risks there are certain behaviors that should be analyzed. If management is refusing to cooperate, meet with, or puts unusual time constraints on the audit team it could indicate fraud. It is also important for the audit team to monitor managements tolerance of violations of the companys code of conduct, inconsistent accounting practices, or frequent changes to estimates for no reason. (Public Compaany Accouning Oversight Board, 2010) These can be key indications of managements character and ethics.In the case of North Face since management established a goal to reach $1 billion in sales the audit team should have been more critical of the sales, revenue, and margin that were posted. The audit manager should have used due professional care when analyzing the fact that North Face was having a hard time mainstreaming their p oint of intersection yet implemented this lofty goal. If fraud was going to occur it would credibly be in the revenue/sales area. The first auditor engagement partner did catch the material misstatement but had these other considerations been taken into account the misstatement may have been investigated further.Even though it is not the responsibility of auditors to assess the quality of key decisions, by doing so they can gain valuable penetration into how management thinks. Conclusion When auditing firms find financial misstatements it is important that they understand the materiality and reason behind the misstatements. The good thing that came out of this case is that the remains worked. When the concurring partner reviewed the audit work papers the misstatement and revision was detected. The SEC sanctioned those responsible and even though the investors were affected they should feel some certainty that the system worked.References In the Matter of Richard Fiedelman. (2003, October 1). Retrieved November 4, 2012, from U. S. Securities and Exchange Commission http//www. sec. gov/ litigation/admin/34-48578. htm Accounitng Standards Oversight Board. (1980, August). AU office 326. Retrieved November 4, 2012, from PCAOB http//pcaobus. org/Standards/Auditing/Pages/AU326. aspx Knapp, Rittenberg, Johnstone, & Gramling. (2012). Contemporary Auditing. Mason Cengage Learning. Public Accouniting Oversighe Board. (1972, November). AU Section 230A. Retrieved November 4, 2012, from PCAOB http//pcaobus. rg/Standards/Auditing/Pages/AU230A. aspx Public Accounitng Oversight Board. (2001, celestial latitude 15). AU Section 150. Retrieved November 4, 2012, from PCAOB http//pcaobus. org/Standards/Auditing/Pages/AU150. aspx Public Accounting Oversight Board. (2004-06). Auditing Standard No. 3. Retrieved October 28, 2012, from PCOAB http//pcaobus. org/Standards/Auditing/Pages/Auditing_Standard_3. aspxretentionandsubsequentchanges Public Compaany Accouning Oversight Board. (2010, December 15). Auditing Standard No. 14. Retrieved November 4, 2012, from PCAPB http//pcaobus. org/Standards/Auditing/Pages/Auditing_Standard_14. spx Public Company Accounitng Oversight Board. (1982, April 1). AU Section 339A. Retrieved November 4, 2012, from PCOAB http//pcaobus. org/Standards/Auditing/Pages/AU339A. aspx Public Coumpany Accounting Oversight Board. (2010, December 15). Aditing Standard No. 11. Retrieved Novembe 4, 2012, from PCAOB http//pcaobus. org/Standards/Auditing/Pages/Auditing_Standard_11. aspx Vorhies, J. B. (2005, May). The hot Importance of Materiality . Retrieved November 4, 2012, from Journal of Accountancey http//www. journalofaccountancy. com/Issues/2005/May/TheNewImportanceOfMateriality. htm